These are four general disclosures that both broker-dealers and investment advisers must make (and that also apply to agents and IARs by extension):
Here’s a helpful definition from the Merriam-Webster dictionary:
A conflict of interest exists when a financial professional could personally benefit from something connected to a client interaction. For example, an investment adviser might be compensated by an issuer for recommending that issuer’s security to clients. If your adviser has a financial interest in recommending a specific security, product, or service, that’s something you’d want disclosed.
Conflicts of interest aren’t automatically illegal or improper. The problem arises when a conflict exists and isn’t disclosed. That’s why disclosure is the key requirement. Here are common conflicts to recognize:
Notice that most of the conflicts listed above involve recommendations. Broker-dealers can recommend securities, but their core business is executing transactions. Many broker-dealer trades are unsolicited, meaning the customer initiated the trade without influence from a financial professional. In those situations, broker-dealers are not subject to a fiduciary duty, and conflicts of interest are less likely to arise.
Investment advisers, however, must always act in a fiduciary capacity with their clients. That means advisers must remove and/or mitigate conflicts of interest as much as possible. If a conflict still exists, it must be disclosed.
When financial professionals communicate with investors online, they must follow certain protocols to stay compliant with regulatory requirements. In 1997, NASAA released an order relating to internet communications. As the internet became a common way to communicate in the late 1990s, regulators needed a consistent approach - especially around registration.
A key question is whether online activity counts as “doing business” in every state where readers happen to live. For example, suppose an IAR is registered and operating in only one state, but discusses securities in an online comment thread (Facebook, Reddit, etc.). Users from all 50 states join the conversation. Does the IAR need to be registered in all 50 states?
It depends on what the communication looks like. Under the 1997 NASAA order, registered persons are not considered to be “transacting business” if the following requirements are met:
Additionally, the same NASAA order requires agents and IARs to:
Keep in mind these rules apply only to online communications an agent or IAR makes while acting in a professional capacity. They generally don’t apply when the person isn’t discussing securities or is clearly speaking personally. For example, an agent posting a general comment about the stock market on Facebook in their free time would generally not be subject to the rules above. If the comment is made in a personal capacity and doesn’t reference professional affiliations, it typically falls outside the administrator’s jurisdiction.
To comprehend the concepts discussed in this section, you must be knowledgeable in regards to agency and principal capacities. Follow this link for a refresher on the topic.
The capacity in which a securities transaction occurs must be disclosed to investors. In most cases, broker-dealers disclose capacity on the trade confirmation after the transaction is executed. Trade confirmations must be sent to investors by settlement, which is typically the first business day after a trade occurs (depending on the security; the details are not important for the Series 65).
Most capacity disclosures happen after the trade, but some situations require disclosure before the trade. In particular, pre-disclosure is required if an investment adviser’s recommendation will result in a principal transaction.
For example, an adviser recommends ABC Company common stock, and if the client agrees, the stock will be sold out of the adviser’s inventory. Because the adviser is on the other side of the trade, this creates a conflict of interest that must be disclosed during the recommendation.
Agency cross transactions also require certain pre-disclosures. This type of transaction occurs when an investment adviser “crosses” two of their own clients on the same trade.
For example, assume an adviser has two clients - Leon and Ebony. On a quick phone call with their assigned IAR, Leon expresses interest in buying Tesla stock. Later that day, the IAR reviews Ebony’s account and determines her current Tesla position is unsuitable. The IAR recommends that Ebony liquidate the position, and she agrees. The IAR then contacts Leon, matches the two clients on the trade, and earns an advisory fee from Ebony.
That example would not be considered unethical if the following conditions were met (according to NASAA rules):
In the example above, the recommendation was made only to Ebony, which satisfies the last condition. In addition, the written disclosures and written approvals must be in place before executing the agency cross transaction. Finally, don’t overlook the annual disclosure requirement that applies to all clients.
Financial firms and their representatives may provide access to third-party research reports as an ongoing service. Many of these reports offer investment insights on specific securities from the perspective of professional analysts. With more data and analysis available, clients can make more informed decisions.
NASAA rules emphasize one major requirement: disclose the source. The registered person must not imply that the research is their own.
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